Date posted: 22/06/2020

COVID-19 and personal income tax rates

How does Australia’s taxation of labour compare from a global perspective?

In Brief

  • Balancing the books post COVID-19 vs opening consumers’ wallets
  • Do Australia’s personal tax rates need changing?
  • A look at Australia’s personal tax burden

By Susan Franks, Senior Tax Advocate, Chartered Accountants Australia and New Zealand

With government debt rapidly increasing there has been speculation that the proposed personal income tax cuts will abandoned.  Others have been proposing income tax levies.

COVID-19 has shown that a significant amount of Australia’s labour supply can be provided remotely.  On-line training sessions is now the norm.  Accounting, legal, financial advice and technology support can be delivered from anywhere. 

When the COVID-19 restrictions are lifted businesses will be re-examining their operations and considering what is the most efficient way to provide their products and services.  For many, the cost savings in commercial rent alone may well result in the retention of remote working.  The question then becomes remote working from where. 

Whilst for most of us that has been from the comfort of our Australian homes, we could see more businesses just as easily utilising people from anywhere in the world. 

So how does Australia’s taxation of labour compare from a global perspective?

Australia’s reliance on personal income tax is high, the second highest in the OECD, if social security contributions in OECD countries are ignored[1].  When both income tax and social security contributions are considered, at 27.9% Australia has the seventh lowest tax impost on wages[2].  This indicates that Australia’s taxation of labour is relatively low.

These comparisons indicate that Australia’s personal tax settings are about right.  What makes a difference in relation to the cost of labour is the value of labour itself.  Australia’s labour needs to be highly productive to justify its use.  Increasing the taxation of labour would make it harder for employers to justify the employment of extra people. 

Does that mean that Australia should reduce its personal tax burden? 

Australia already has legislated further reductions in personal tax rates[3].  From the 2022/23 year the 19% personal income tax bracket will increase from $41,000 to $45,000 and the low income tax offset (LITO) will increase from a maximum amount of $645 to $700 per annum.  From the 2024/5 year the 32.5% marginal tax rate will reduce to 30%. 

These legislated changes, announced in the 2019/20 Budget, were stated to “provide immediate relief to low- and middle-income earners, support consumption growth and ease cost of living pressures.  It will also introduce structural changes to provide more reward for effort and to maintain our international competitiveness.”[4]

In times where many economists are citing low consumer and investment confidence, the idea of bringing forward these tax cuts is being considered by some as a further way to stimulate demand. 

But what about those facing COVID-19 temporary or structural unemployment?  They don’t benefit from tax rate cuts and need support funded through the collection of tax.

The government is faced with a difficult balancing act: rewarding those who have maintained a job and supporting those struggling due to COVID-19 unemployment. 

The political capital that could be burnt through changing the personal tax burden could be high. 

With the number of choices that the government faces, this appears to be one area that is left best alone unless there are inappropriately high effective marginal tax rates due to the interaction of the tax and transfer systems. 

Sources

1. https://www.oecd.org/tax/revenue-statistics-australia.pdf

2. https://www.oecd.org/tax/tax-policy/taxing-wages-brochure.pdf

3. https://www.ato.gov.au/General/New-legislation/In-detail/Direct-taxes/Income-tax-for-individuals/Lower-taxes-for-hard-working-Australians--Building-on-the-Personal-Income-Tax-Plan/#:~:text=The%2032.5%25%20marginal%20tax%20rate,more%20than%20%24200%2C000%20is%2030%25

4. https://budget.gov.au/2019-20/content/bp2/download/bp2.pdf pages 17 and 18